The leak of some 11.5 million documents from the Panamanian law firm Mossack Fonseca has triggered outrage around the world. There has been speculation as to how revelations about large offshore holdings belonging to politicians and schemes to avoid paying taxes employed by the superrich will feed into the wave of anti-establishment political sentiment swelling around the world as well as resentment for the supranational caste of “one percenters” — as evidenced, in particular, in the current U.S. presidential campaign.
The remarkable sweep of tax avoidance and the scope and reach of the global network facilitating the movement of gray funds across national borders suggest a bigger problem that transcends individual wrongdoing. Some estimates suggest that more than $20 trillion has been stashed in offshore accounts.
The real culprit is the relentless creation of liquidity by major central banks. Money pumped into the world financial system, especially since the 2008 financial crisis, has undermined political systems in emerging economies. However, the damaging effects of the uneven distribution of wealth — the creation of the super-rich class and unprecedented expansion of corporate profits as a share of GDP on the one hand and the disintegration of the middle class on the other — are being increasingly felt in rich industrial democracies, as well.
Robbing One’s People
The leaked papers from Panama have named names and ended or damaged political careers. But they didn’t reveal anything new. With a couple of notable exceptions, the affair has been focused on third-world countries, most with a history of politicians keeping their hands in the public till. The longer such public servants remain in power, and the less opposition they face, the more shamelessly they steal.
Nor is it major news that corrupt politicians like to keep their money hidden from view, and that rich people like to evade taxes. Banks in Switzerland, Luxembourg and Lichtenstein used to cache illicit cash in previous generations.
The real takeaway from those revelations is the unprecedented scale of the pilfering. One estimate puts illegal capital flight from developing economies at around $8 trillion in the 10 years between 2004 and 2013, the equivalent of India’s, Brazil’s and Russia’s GDP combined, with Germany’s GDP thrown in. That was also a decade of bloated commodity prices. The sum represents a good chunk of super-profits those developing economies earned by exporting commodities.
Pervasive corruption has undermined development. In 2001, Jim O’Neill of Goldman Sachs coined the term BRICs to include Brazil, Russia, India and China. Those large, populous countries were expected to dominate the world economy by the middle of the century, and provide the bulk of global growth in the interim. During the ensuing dozen years, this forecast seemed to be coming true as the BRICs grew at a remarkable pace.
But now all of a sudden their future is looking a lot less rosy. Two of the BRICs, Brazil and Russia, are in a recession and even China’s growth model has started to sputter. Politicians in all three of those countries have been tainted by massive corruption. In Brazil, the country’s previous president is under investigation for massive corruption and his hand-picked successor, Dilma Rousseff, is facing impeachment. Neither was mentioned in the Panama papers, but a large number of other politicians were. The seven parties they represent include a former government coalition partner and the largest opposition party.
Ton of BRICs
Russia’s president Vladimir Putin has been a particular focus the Panama leak. While his name wasn’t mentioned directly, there can be little doubt that some $2 billion poured into offshore companies, nominally owned by an obscure cellist and Putin’s childhood buddy, actually belonged to the Russian president. This included kickbacks from rich Russian oligarchs and state-owned companies. Moreover, it is probably only the tip of an iceberg, since Putin’s secret fortune, amassed since he became Russian president in 2000, has been estimated upward of $40 billion.
High Russian government officials, including regional governors, members of parliament and even Putin’s personal spokesman, were also found to have offshore accounts and companies. Since 2009, over $500 billion has left Russia, with outflows averaging 3% of GDP a year.